How I Bought My First Rental Property at 24

mohamed Hassan via Pixabay

I set a goal to purchase a rental property by 2021 as a step in making my day job “optional” by age 35. I believe that the fastest, most reliable way to guarantee years of monthly cashflow is real estate. Shelter is one of the basic needs of a human, after all, and there will always be demand for housing. Confident in my simple cause-and-effect logic, I began my journey of becoming a landlord at age 24.*

Now that my mind was made up guess what my first step in beginning my real estate empire was? Yup, I Googled it. To my disappointment, most of the resources I found offered vague goals of saving up for a down payment and being proactive in a finding a good deal (shocker!). I just wanted a straightforward, numbered guide. I vowed that once I buy my first property, I would document my journey candidly in the hopes that future investors, who are pre-planning maniacs like me, can benefit from it.

So here’s a quick visual of my first real estate deal, closed in January 2021. This was an out-of-state deal and a completely remote process — I did not visit the property or meet any of the involved professionals in person.

Timeline of My First Real Estate Deal

I hope that this article can serve a dual purpose: an informative guide on what to expect at each step of a real estate deal, as well as a nudge to take the leap into your first purchase. I’m disclosing as much information as I feel comfortable with, including transparent numbers wherever applicable. Without further ado, here’s a no-frills documentation of my first real estate deal.***

*There are many ways to invest in real estate, such as REITs, real estate-centered ETFs, and crowdfunding. I wanted the experience of being a landlord, so I decided to pursue property investing.

**This is a documentation of my personal experience and should not be treated as official financial advice. This particular deal was conducted remotely, so my experiences will likely resound more with out-of-state investors. During this process, I felt that too much information can be overwhelming, so some of these steps may seem simple — I trust that you’ll do your own research for each step as needed.

*** I decided to buy out of state because I couldn’t afford properties where I live in Los Angeles, where I pay sky-high rent and save as much as I can. The rental income that I would generate in LA would not make sense with the up-front cost I would pay. Instead, I decided to look into markets in the Midwest, where property values are cheap and rental demand is high.

1. Set SMART goals.

Let’s take it back to fifth grade. Who knew what we learned in school would actually apply to real life! Setting specific, measurable, attainable, relevant, and time-based goals are key to landing a real estate deal.

I recommend setting SMART goals around: location (at least the state, if not the specific city), monthly cashflow goal (hard number), property type (single vs. multi-family, house vs. condos), and condition of property (e.g., turnkey vs. rehab, and kind of rehab you’re willing to do e.g., cosmetic vs. structural).

Let me give you an example of how my SMART goals evolved — from April 2020, when I was still wary of using my hard-earned savings for a real estate deal, in November 2020, when I put in my first offer less than a month after revising my goals.

April 2020:

• Out-of-state turnkey properties to buy and hold long term
• Positive cash flow each month
• Good tenants
• Minimum repairs and maintenance costs
• 130K price maximum
• Looking to buy in 2021

November 2020:

• Looking to buy in the next 3 months
• Monthly cash flow of $80 + after all expenses
• Property in TN or IN in a B or C-class neighborhoods
• Existing tenant with more than 3 months of lease time remaining
• Property price below $110k with financing (already preapproved)
• No issues with roof/ mold/ HVAC

2. Set up a separate bank account for all house funds. Save up enough for a down payment with some buffer room.

Steps 2 -4 can be done simultaneously. I decided to put this step first because there may be a bank set-up time, while the perfect property may surface at any time. I recommend getting both a checking (for fund transfers during the closing process for any immediate repairs and maintenance costs) and a high-yield savings account (for rainy day funds). Below is a suggestion of what you can put in the accounts:

Checking Account

• Save up for immediate funds, including closing costs and any immediate repairs needed before your property is tenant-ready. Remember, the goal is to generate cash flow as soon as possible, so your initial goal should be to make the home habitable (unless it is a turnkey property).
• I put down 25% for my investment property (typical percentage). Closing costs will run you anywhere between 3–6% of your loan amount. Mine was 6%.

Savings Account (High-Yield)

• Save up an emergency fund for future repairs and maintenance and other capital reserves.
• For big-expense items like roofing and HVAC replacement, check the expiration date during inspection, so you can budget accordingly for the year that they need to be replaced. Typical shingle roofs last ~25 years, and the typical HVAC lifespan is 15 years.

3. Find and analyze the property that fits your criteria.

After months of blindly searching Zillow and Redfin based on aesthetics of property photos (tip: photos lie!) I used free online rental property calculators to kickstart my analysis. On a high level, most calculators offer comparisons of cost, expense, and income, allowing you to analyze the initial investment against the resulting cashflow and net operating income. This quantitative approach allows you to quickly walk away if a property doesn’t match your numbers.

I would also encourage you to take a look at property tax data, ZIP code data, Google Maps Street View, and general market trends. A good balance of quantitative and qualitative analysis will position you for success. Below are the analyses I personally performed:

Download free online calculators. I personally used Roofstock and BiggerPockets.

• These calculators already have built-in assumptions (e.g., 5% vacancy rate).
• You can tweak the numbers however you want, at least for these two resources.

Look up property tax information for both state and county.

• The best way to do this is to visit the specific county website and search up your property by address to access the most recent year’s tax information.
• Here is the tax look-up page for Shelby County in Memphis, TN, which is where my property is located.

Look up zip code data. Get an idea of:

• Area demographics
• Percentage of renters vs. owners
• Vacancy rate

Look up general market trends for the property location. Ask yourself questions like:

• Is the population decreasing or increasing?
• Are there new jobs being created in the area?
• How is the surrounding school quality?

Call up a real estate agent from the property location and ask about the real estate trends from the area.

• Zillow can help connect you to agents in the local market on a specific property listing.
• Ask to be put on the agents’ listings, so they can send you a list of properties that fit the criteria that you define through your SMART goals. You’ll get emailed listings as soon as they hit the market, even for properties that aren’t available for viewing on Zillow/Redfin yet. This service will be free of charge.
• The typical commission fee averages about 5 percent to 6 percent of the home’s sales price. Generally, the seller pays the commission for the services of both their listing agent and the buyer’s agent.
• If you are an out-of-state investor like me, you can also leverage local real estate agents to provide even more detailed videos or photos of the property and surrounding areas if they are near the property location. The agent that helped me out with my deal drove past the property and relayed in real-time information about the property's condition.

4. Get a pre-approval.

Your offer will be stronger if you submit a pre-approval letter along with it. Keep in mind that pre-approvals are valid for 90 days and will have an impact on your credit score. During this 90-day period, there will only be one hit to your credit score even if you apply for pre-approval from multiple lenders. Use this to your advantage, and shop around for the best rates, terms, and service, and document the process. Here is a screenshot of a spreadsheet I put together while I interviewed five lenders.

A documentation of my lender interviews.

If you’re not ready to commit to a pre-approval and don’t think you’ll purchase in the next 3 months, I recommend going through the pre-qualification process. Pre-qualifications do not analyze credit reports, and therefore, are not an indication of a buyer’s creditworthiness. Therefore, pre-approvals have more leverage in the offer process. Read more about detailed differences between pre-approvals and pre-qualifications here.

Here are some items your lender may ask you for the pre-approval letter:

• Tax returns
• Pay stubs, W-2, or other proof of income (two years)
• Bank statements
• Credit history
• Photo ID
• Rental history
• Immigration documents

5. Put in an offer. Negotiate.

Once you find a property that fits your criteria, don’t hesitate to put down an offer. If it’s an attractive property in a hot market with low inventory, chances are that it will get snatched up soon. For my property, I emailed my agent an hour after he sent me the listing, and someone had already made an offer on it. The previous potential buyer ended up getting cold feet and pulling out, so I was able to submit an offer.

The exact offer amount to submit differs by location. In a popular area in Los Angeles, it may be typical to submit an offer that is higher than listing price in the hopes that the offer price can beat out other investors. As for me, I was buying in Memphis, TN, and really wanted to make my numbers work to get a decent cash flow each month. Based on my calculations, I submitted a little below the listing price at a price point that would make the most sense for me.

In most situations, at the purchase price that I was looking at (around $100K), I’d recommend not going lower than 10% of the asking price as to not “offend” the seller. Your goal is to have the seller counter the offer and leave room for negotiation or accept the offer as submitted, not for them to scoff at a 50% listing price deduction and reject the offer outright.

If the house needs major rework, you can negotiate credits for estimated repair work at a later point in the buying process, rather than taking it into account in the offer price. Remember to submit the offer with a pre-approval letter for greater leverage.

6. Once an offer is accepted, notify your Lender and hire a title company.

Once your offer is accepted, you want to notify your lender. They’ll start the loan application process and ask for additional documents. If you go with the lender you attained your pre-approval from, they’ll likely already have most of the documents they need.

Next, your lender will ask for information on your title company. If you haven’t done so already, hire a title company. My agent recommended a reputable title company that he had worked with in previous sales, but you can also do your own research and interviews to determine the best fit. Some title company duties include:

• Performing a title search on the public property history to make sure there are no existing problems or potential future problems that could cause future litigation. The lender will proceed with the loan package finalization only after this step is complete.
• Ensuring that all the documents related to the ownership of a property are in order before real estate transactions are executed.
• Providing an agent to oversee the closing process.
• Setting up an escrow account that contains all funds necessary to close on the home.
• Helping package together all closing documents for signing. Mine also helped schedule my mobile notary.
• Collecting all closing costs and disbursing funds to the seller.

I paid $1200 for my title policy and all services (escrow fee, notary fee, closing protection letter). From this point on, your lender and title company will work for hand in hand to prepare your closing package.

7. Deposit earnest money.

Soon, your title company will collect your earnest money (also known as good faith deposit), usually amounting to 1% — 3% of the sale price (I paid 1% of my sale price). The purpose of this fund is to ensure that you’re serious about the purchase. The sum will sit in an escrow account (a savings account that the lender temporarily holds large sums of money in) and will be returned to you as a credit when all closing costs are collected.

In my case, my lender asked for a good faith deposit of $500 to ensure against services like appraisals. This amount was credited back to me at closing.

8. Wait for your lender to schedule an appraisal, and order a home inspection

Home Appraisal: A home appraisal is a licensed appraiser’s review of a property’s value, based on recent sales of comparable properties in the area and an appraiser’s analysis of the property. The property’s location, size, and complexity can play a role in the determined value.

A home appraisal is a required step in order for the loan to qualify because the lender needs to make sure that the loan amount somewhat matches the property’s appraised value. If the appraised value comes back drastically lower than the loan value, the lender may be hesitant to proceed with the loan.

Your lender will order a home appraisal with their preferred appraisal company, but you’ll be responsible for paying the fees. While home appraisals typically cost between $300 — $400, it can cost up to $1000 for complicated properties. Mine cost $540, and it took 4 days for me to access the appraisal report after the scheduled appraisal date.

Home Inspection: Contrary to the home appraisal, a home inspection determines the condition of the home rather than the value of the home. You can use the inspection results to negotiate any repair credits with the seller. Below are some tips on home inspections:

• The most reputable home inspectors may not be the best ones. They may just be the most expensive.
• Interview multiple local inspectors before hiring one that fits my price range. Below are questions I asked when I interviewed 4 home inspectors:

Could you send me a sample inspection report?

Are you able to detect signs of destructive damages, such as mold, pest, and water damage?

Are you able to provide a thorough check of high-cost repair items, such as the HVAC lifespan and roofing, and provide recommendations for keeping these in top shape to extend their lifespans for a rental-ready home?

I’m an out of state investor, and want to negotiate repair credits with the seller. Could you prioritize items that you think can be used as a leverage in these negotiations?

• Follow up with the home inspector after results are in, and ask them for their opinion on how best to communicate critical repairs during the negotiation process to get the most seller credit and ensure that your rental property lasts through multiple tenants.
• If the home is already tenant-occupied and the inspector had interacted with the tenant, ask the inspector to share some impressions of the tenant. My inspector let me know that my tenant will not re-sign the lease as she will be moving out of the state. This was good for me to know so that I can anticipate finding a new tenant after the current lease expires.

9. Hire a property manager.

While some first-time real estate investors want to manage their properties for experience, I didn’t have a choice because I was an out-of-state investor. The ultimate goal of a real estate investor is to make the property as rental-friendly as possible for as long as possible, and a great property manager can achieve this while allowing you to focus on future investments. Thus, it’s crucial to go through a vetting process to find a property manager that not only has a proven track record but also works well with your working style.

Here are some ways to find a property manager:

• On Zillow, filter for houses/ apartments for rent in the area you’re investing in, and click on listings that look attractive to you. Property managers that catch your attention now will likely catch the attention of future renters. Contact the Property Management company on that listing.
• On the BiggerPockets forums, look for recommendations. Here is a thread that I referenced.

Here are a few questions I asked as I interviewed 3 property managers:

Can I see a sample of your Property Management Agreement?

What is the management contract cancellation policy?

How many rental units do you manage around the area?

Do you collect management fees when a unit is vacant?

Walk me through your tenant screening process.

How long does it take you to turn a property around in between tenants?

What do you charge for evictions?

Do you take photos of the property before and after move in and out?

How do you update owners on their properties? How often does this communication happen?

In my case, the property was already under professional management. It worked out that the property management company that I liked the most was the existing company. All they had to do was transfer the ownership from the previous owner to my name, along with the security deposit. I was also able to negotiate a lower management rate.

10. Submit requests for repair/replacement based on inspection.

By this time, you’ll have received the results of your home inspection. Thankfully, when I was analyzing the property, I had already vetted for big issues (structural/roofing/HVAC) with my agent, so the inspection result was pretty clean.

I had asked my home inspector to prioritize the list of issues that would need to be addressed. I also worked with my agent to understand the seller’s budget and willingness to repair before submitting the requested list of repairs. Below are the items that were included in the request — as you can see, most of them were cosmetic. The seller had a general handyman on call, and he even made some of the easy repairs for free:

• Check for rodents and order pest control if found (signs of dropping found during inspection).
• Exterior vinyl/ loose board replacement.
• Exterior loose light fixture replacement.
• Missing kitchen cabinet handle.
• Loose doorknob.
• Grout on the ground.

I was given two choices when the quotes for the rest of the repairs came in: decrease the purchase price or credit through a seller concession. We decided to go with the latter option and ended up submitting an amendment for a seller concession, as changing the purchase price would result in a re-calculation of the loan package.

11. Review final closing disclosure and get a notary.

When all amendments are submitted and signed, the lender will provide a closing disclosure (a 5-page form that outlines the purchase terms and loan details) at least three days before the closing date.

Once you review the disclosure and sign it, you can order a notary to prepare for the final signing of all closing documents. Notarization protects against fraud, and in many states, must be done in person. Bear in mind that your notary must be authorized to notarize in the specific state that your property is located in. My title company helped with scheduling a mobile notary, who traveled to my apartment with the complete closing package.

12. Pay closing costs a day before signing closing documents.

To make sure all funds are disbursed on or close to the actual day of closing, it’s important to wire transfer/ send a cashier’s check to the title company prior to signing. I ended up writing my funds the morning of my signing (Friday), which delayed the disbursement process a couple of days (Monday), which the seller was not thrilled about.

My closing documents were around 80 pages, and it took 30 minutes to review and sign everything with the notary. Once the funds were disbursed, the purchase was complete! The only other communication I received from my team was a “Congratulations” from my agent and some signed documents (closing documents, Warranty Deed, Title Policy) from my title company.

13. Make your first payment!

My lender set up a great online portal for me for my monthly payments for the next 15 years (I hope to hold the property as long as I can). My monthly payments include the loan paydown, and funds for my escrow account, which includes monthly payments for homeowners’ insurance and property taxes.

The escrow account is convenient as the payments are collected in manageable monthly increments and kept safe until the day they are due. In the case that the actual amount owed for taxes and insurance differ from the amount of funds in the escrow account (e.g. calculation error), the lender will either refund you, or ask you to cover the difference.

What do you think? Did the process intimidate you, or inspire you start investing in real estate? I’m by no means an expert, but I took the plunge, messed up a bunch of times, learned a bunch more.

Going through the process once gave me the confidence that I’ll close an even better second deal. Real estate is starting to turn into a passion, and I’m excited to grow my investment portfolio.

I hope this documentation helped you, and if you ever want to have a conversation about real estate, drop a comment below, and let’s connect.

This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.